Should we abolish stamp duty on house purchases and replace it with a yearly tax on property owners?

Should stamp duty be abolished on purchases of a home?

Many economists argue it is a terrible tax which promotes inefficiency in the housing market by restricting activity. It is a big barrier for first-time buyers, for example, who have to save more cash to pay the Treasury. It can also hold existing homeowners back from upsizing or downsizing.

Stamp duty "is a particularly bad tax because it makes transactions very expensive", and "a particularly inefficient way of taxing housing", argues David Miles, professor of financial economics at Imperial College Business School, and a former a member of the rate-setting Monetary Policy Committee at the Bank of England, in a previous interview with IBTimes UK.

"It should be a straight percentage of the value of your property is the tax you pay each year, not linked to whether you sell it or not," Miles said, adding that it is also "smoothing the payments over time rather than it coming in one rather unwelcome bill once every 10 years".

"Ideally, you'd want to ensure people could move to where they can find the best jobs," wrote Ed Conway, economics editor at Sky News, in a column arguing for an end to stamp duty. "And yet because stamp duty makes it even more expensive to buy a home, there are financial penalties to moving. The upshot is that in this country, people move far less than they would do otherwise."

But it is also easy to collect because no housing transaction can be completed without it, and the homebuyers have a ready pot of cash from which to extract the tax. So it is very attractive to the Treasury as a revenue-generator, and the alternative — an annual levy on property owners — is a hard political sell.

But does it make sense to switch to a yearly tax and abolish stamp duty? And how much would it cost to offset any loss in stamp duty revenue?

Now for some back of a fag packet calculations; There are 22.4 million households in Great Britain, including owner-occupied and private rented. Dividing the £10.277bn stamp duty receipts in 2015 for residential property transactions between these households amounts to an average of £459. So an average annual levy of under £500 per home would be enough to bring in the equivalent of current stamp duty receipts.

But this is only an estimate and indicative, assuming a flat tax with the same amount payable for every property. Most proponents argue it should be proportional or relative to the property's value, so those with more expensive homes pay a larger levy.

This system is likely to be controversial in London, for example, where the price of ordinary homes is significantly higher than elsewhere in the country. But there are always wonkish ways and means of working through such difficulties, perhaps by having a different set of bandings for London, or giving a household income-linked deduction to the bill.

And it could be argued that by reducing the barrier to entry for owning a home, more people will be able to step onto the housing ladder, increasing the number of households paying the annual homeowner levy, thus boosting Treasury coffers.

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